Global Economics

Philippine ZTE Scandal to Affect Foreign Investment

The cancellation of a national broadband network threatens the confidence of investors from China and other countries, says Chinese gearmaker ZTE

China's network equipment maker ZTE, last week issued a strongly worded statement noting that the cancellation of the national broadband network (NBN) contact "will not only play down the confidence of companies from China, but also from other countries to invest in the Philippines".

The Philippine government in April 2007 awarded CTE a US$300 million-contract to build a broadband network to connect all government agencies and offices across the country. The project was later scrapped after allegations emerged that the deal had benefited high-ranking officials through commissions and kickbacks.

The Chinese technology company said the controversy would harm trade relations between China and the Philippines. It noted that bilateral trade volume had exceeded US$30 billion, with the Philippines enjoying the favorable trade balance of some US$15 billion. In fact, ZTE said China had surpassed the United States to become the biggest trade partner of the Philippines in 2007.

Echoing the same sentiment is Cynthia R. Mamon, managing director of the local subsidiary of U.S. IT vendor Sun Microsystems, which reputedly manages one of the most number of government-related IT contracts in the Philippines.

"Obviously, this issue will send the wrong message to foreign investors that it's not good to undertake IT projects in the Philippines because it's too risky," said Mamon, in an interview with ZDNet Asia.

Dealing with the government, she said, can be very complicated because it is also hard to collect payment once a contract is arbitrarily cancelled or even completed.

The Sun executive said the NBN fiasco was the not first multinational project to suffer the same fate. The Philippine government also scrapped its contract with German company Fraport, which was originally engaged to build the country's newest airport terminal, Mamon said.

The Philippine Supreme Court voided the contract on the grounds that the contract was onerous and ordered the government to take over the facility. The German construction company is currently contesting the ruling in international courts, and has refused to accept the US$64-million compensation allocated by the Philippines' high tribunal.

No legal recourse for ZTE?

Despite the parallelism between the two projects, however, some observers and government officials said the NBN deal was struck under different circumstances.

Tim Diaz de Rivera and Monchito Ibrahim, both commissioners of the Commission on Information and Communications Technology (CICT), told ZDNet Asia in separate interviews that the contract between the ZTE and the Philippine government was never consummated. As such, the agreement can still be rescinded or cancelled.

It was the CICT, then headed by former chair Ramon Sales, which approved the technical viability of the broadband project.

News reports last year highlighted various claims the contract was only a "supplier's contract"—needed for parties to enter into a loan agreement—and could be cancelled, and that it did not have a forward obligation authority (FOA) from the Department of Budget and Management to guarantee there were sufficient funds to pay for the loan.

More importantly, reports said the contract was unenforceable because the loan agreement was not signed by the finance secretary and his Chinese counterpart.

Jesus "JJ" Disini, head of the Internet law and society program at the University of the Philippines College of Law, said as far as the contract was concerned, the Philippine government would have to issue a "notice to proceed" in order for ZTE to begin the project.

"I believe, under the circumstances, the government will just refrain from issuing that notice," Disini said, in an e-mail interview. "I think that given the present climate, it would be unwise for ZTE to bring suit against the Philippines. Being a state-owned company, ZTE must know that China has other contracts with the Philippine government [such as the North Rail] and a lawsuit might jeopardize the relationship."

Theoretically, Disini said, it might be possible for ZTE to sue the Philippine government, forcing it to continue with the project or be liable for damages arising from the termination of the contract.

The lawyer added that the Chinese technology company could claim it had not breached any of its obligations that justify the abrogation of the contract.

"But, even so, I believe the amount of damages ZTE would be able to recover [from a potential lawsuit] would be minimal, because it probably has not suffered much [damages] arising from the cancellation of the agreement," Disini said.

IBM Philippines, another IT service provider which has a large customer base in the local public sector, told ZDNet Asia that it will continue to deal with the government in future projects, but said it was unable to comment on issues that carry political tones.

With the debacle showing no signs of abating, yet, Sun's Mamon said contractors—whether local or foreign—ought to learn a lesson from the NBN fiasco. "The best way to learn from this lesson is to make sure we abide by the law and not engage in temptations," she said.